Comment and opinion for retail investors in the UK
A whole range of recent and maybe curious news items have seemed to me relevant to the short term direction of markets and maybe give us some hints, or at least warning signals, on the likely longer term trend. Here are three for you to ponder.
In the game of chicken that markets have been playing with the Fed, markets put their foot on the gas late in 2022 and bet that the Fed would put the brake on interest rate rises. The US central bank did offer some comfort by slowing a little, but as if wishing to let everyone know that its not going to be forced off the road quite yet, it has been blowing its horn to the tone of ‘we’re not finished yet’ repeatedly over recent weeks.
This week, the markets decided the amount of road ahead before a very messy collision was shrinking a little too fast and touched the brakes. Given the rate of returns on growth stocks (up to 10%) in the first 6 weeks of 2023, that is maybe not a bad thing. Bond yields also picked up again, as we would expect, but I think that is only a temporary blip.
Or, for those of you who have long memories of English media culture, “That was the year that was” (TW3 was the BBC show).
In honour of the legendary David Frost – Hello, good evening and welcome to my backward looking start to this commentary. No singing elements though!
Before we take a look at global stock markets, we need to be reminded who the boss is. If anything the dominance of the US market has expanded which we as Brits may not always remember. This may well be only because the US dollar has returned to being the dominant reserve currency as US interest rates lead the move back upwards. This chart shows the current composition of global equity markets by value (assumed to be in US dollars but could be Euros- source was not clear).
Keep this in mind when reviewing that data below. If you had accepted a market cap weighted global tracker fund (especially a hedged one), you would have been guaranteed poor performance.
After a healthy and sustained period of growth from mid October, global equity markets, as recorded by the MSCI World Index fell back a little in the last week, but the chart still has a solid looking recovery on the right hand side. I have suggested that the market has been poised to react to good news for some time and the slightly more dovish tone of central bankers, slowdown in consumption data and weaker employment numbers will all have been taken as leading indicators that the worst of the monetary tightening (ie rising interest rates and the end of QE) is behind us.
In the UK, the Hunt mini-budget brought the expected fiscal tightening (ie tax rises and spending cuts). That was all as expected and indeed, much had been leaked in advance to soften up expectations. UK markets were more fraught about the prognostications for the UK economy from the OBR, the Bank of England (which has certainly well and truly fallen out with the government) and global economic forecasters.
I will progress to my observations on markets and the investment climate shortly but I want to start by introducing a slight change in the content of my monthly posts – a subtle refresh, if you like. The Digging Deeper part of this monthly missive has now covered enough topics to form a small reference book and until I have a list of new topics to cover, I am giving it a rest.
Instead, I will return to an idea that long term readers may vaguely recall. This will be headed ‘Hit or myth’ and will each month put a few supposed ‘ facts’ about the economic, financial and investment climate under my quality control spotlight for testing to destruction.
There are many such ‘givens’ recycled through the mass media every day, often referenced by people who ought to know much better – like politicians and the financial or ‘money’ editors of quite serious publications and broadcasters – but some of these accepted truths are in fact imagined or based on what I think are false premises.
Much of my analysis is on offer because of one of the few advantages of being older now, that is having many decades of working in the financial services sector and just as long reading and viewing extensively to try and understand the human condition. Not Harry may not have the supposed (Biblical) advantage of ‘grey haired wisdom’ but that is only for want of raw material!
You may well disagree with some or even all of what I suggest is the reality, as opposed to the myth. The constraints of a blog post mean that I am not able to write a thesis in support of my opinion and in most situations, it does not really matter what I think. The world will carry on as it wants to, of course.
I am only hoping that I can prompt my readers to take a skeptical view of the ‘accepted wisdom’’ and that this will better inform your asset allocations decisions. At times, what I predict is a nonsense does eventually prove to be exactly that (eg valuations of shares like Nikola, ASOS and THG, or the incredible track record of certain Baillie Gifford funds) and people who shared my skepticism may well have benefited in their pockets!
This heading of course refers to political events in the UK over the last month. If October 1987 gets remembered for Michael Fish and the hurricane that he so confidently dismissed, October 2022 will forever be associated with the name of Liz Truss.
The (predictable, and in fact actually predicted) consequences of the Kamikwasi not a budget mini-budget are now largely behind us, apart from the damage done to the UK’s reputation internationally and the opening of a rip in the relationship between the Treasury and the Bank of England. Apart from enhancing the case for fixed income assets which I had been exploring anyway, I can’t find anything relevant to say about what is now a dead event and we must now await for the proper, normal(ish) Autumn Statement due in a couple of weeks.
I am pausing my mini-series of posts on selecting bond funds for specific objectives to write about some high level issues, because what has been happening in the fixed income markets recently has been so remarkable that it is being described as a ‘first’ by specialist managers with over 30 years experience.
I will pose and answer some questions but would welcome others from readers with a view to publishing the answers in another post. Please use the comments option or email me if you prefer.